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Econ 1a Final (Stanford)
Study cards for a Stanford Econ 1a final (I suck at econ, so bear with me).
62
Economics
Undergraduate 1
03/21/2012

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Term
Marginal Principle
Definition
maximization means equating returns at the margin
Term
Gains from Trade
Definition
voluntary exchange benefits both parties
Term
Basic Competitive Model
Definition
assumes competitive markets, rational consumers, profit maximizing firms
Term
Price Elasticity of Demand
Definition
percentage change in quantity divided by percentage change in price -> minus sign is implicit, is unit free, is not the same as slope
Term
Two reasons for downward sloping demand
Definition
Income Effect and Substitution Effect
Term
Income Effect
Definition
lower prices means your real income has increased (you can afford to consume more)
Term
Substitution Effect
Definition
lower relative price induces a shift from other goods to this one
Term
Market Demand Curve
Definition
horizontal sum of individual demand curves (literally add up the quantities on the individual graphs to calculate the market curve)
Term
Market Supply Curve
Definition
horizontal sum of firm supply curves (add up the quantities and graph the summed points to construct the market curve)
Term
Price Ceilings
Definition
fixed 'highest price' charged for an item -> creates shortages, dead weight loss, Qs < Qd
Term
Price Floors
Definition
fixed 'lowest price' charged for an item -> creates surpluses, dead weight loss, Qd > Qs
Term
Total Cost
Definition
sum of fixed costs and variable costs
Term
Fixed Costs
Definition
do not vary with output (ex. buying a factory)
Term
Variable Costs
Definition
vary with output (ex. paying a higher water bill if you use more water)
Term
Marginal Cost
Definition
change in total cost due to one unit change in quantity produced -> curve goes through minimum of Average Cost curve
Term
Firm's level of production (competitive)
Definition
where price equals marginal cost -> if this is a competitive market, price = market price since the firm is a price taker
Term
Profit
Definition
= (price - average total cost) * quantity
Term
Short run supply curve
Definition
shifts as new firms enter -> slides show that short term produces a higher quantity than before for a higher price and then tends to an even higher quantity for a slightly lower price over the long run
Term
Long run competitive equilibrium
Definition
zero profit for a firm because P = ATC, market tends toward competitive equilibrium
Term
Pareto Efficiency
Definition
not possible to make someone better off without making someone else worse off
Term
Pareto Efficiency Conditions
Definition
1. Marginal Benefit = Marginal Cost
2. Marginal cost is equal for every producer
3. Marginal benefit is equal for every consumer
Term
Monopoly
Definition
price setter rather than price taker -> sets production quantity where marginal cost = marginal revenue, produce less for a higher price and create deadweight loss
Term
Natural Monopoly
Definition
situation in which the fixed or start up costs are extraordinarily high (high barriers to entry) and it is most efficient (lowest long run average cost) for production to be concentrated in one firm
Term
Price Discrimination
Definition
charging different prices to different groups of customers
Term
Price Discrimination Rule
Definition
equalize marginal revenue in all markets -> the less elastic the demand, the higher the price
Term
Monopolistic Competition
Definition
many differentiated products, free entry and exit into industry
Term
Oligopoly
Definition
few large firms, aware of interaction with rivals, barriers to entry, less product differentiation
Term
Cartel
Definition
when firms act jointly (collude) to maximize joint profits -> creates an incentive for them to cheat, since P > MC while they are underproducing
Term
Reasons for Market Failure
Definition
imperfect information, externalities, public goods
Term
Externalities
Definition
when private and social costs diverge (create deadweight loss) -> negative externalities cause oversupply, positive cause undersupply (surplus and shortage)
Term
Four types of goods
Definition
Private - E and R, Common - NE and R, Club - E and NR, Public - NE and NR -> E = excludable, R = rivalrous
Term
Free-Rider problem
Definition
nonexcludability means that people have no reason to pay
Term
Labor Supply and Demand
Definition
graphs wage v. quantity of labor with labor supply and labor demand. Market wage and quantity are the same as equilibrium elsewhere
Term
Marginal Revenue Product of Labor
Definition
change in total revenue from one more unit of labor -> for competitive firm, MRP = P*MPl, for firm with market power, MRP = MR*MPl
Term
Labor Supply
Definition
choice between work and leisure (meaning all other activities)
Term
Labor Supply Curve
Definition
is backward bending -> at bottom, substitution effect dominates and people work more for more pay; at middle, sub. and income effects balance and people work the same for more pay; at top, income effect dominates and people work less for more pay
Term
Profit Max. in Monopsony
Definition
Occurs where marginal expenditure on labor equals marginal revenue product of labor (MEl = MRPl), MEl curve is above the wage curve (both are supply lines and MRPl is demand line)
Term
Capital Stock-Adjustment
Definition
as quantity of capital stock issued goes up, price goes down -> long-run equilibrium equals the cost of production (I don't understand this graph, tbh)
Term
Present Discounted Value
Definition
PDV = R/(1+i) + R/(1+i)^2 + ... + R/(1+i)^n + F/(1+i)^n -> n = num periods, i = yield (market interest rate), R = coupon value, F = face value
Term
Risk/Return relationship
Definition
higher risk should correlate to higher return -> the graph is an upward sloping line, with risk on x axis and return on y. when points are off the risk/return line they tend to move towards it by shifting their price
Term
Comparative advantage
Definition
when one country has a lower opportunity cost for making a good than another
Term
Bases for Comparative Advantage
Definition
factor abundance (applies especially to exports), technology, specialization (increasing returns - has intraindustry trade written here)
Term
Factor Price Equalization
Definition
the relative prices for two identical factors of production in the same market will eventually equal each other because of competition
Term
S&D in Small Country Imports
Definition
if Pworld is lower than Peq -> domestic consumption, quantity increase, price decreases, domestic production decreases but imports fill the gap
Term
S&D in Small Country Exports
Definition
if Pworld > Peq -> domestic consumption decreases, price increases to Pworld, domestic production increases, starts to export good
Term
Effects of Tariff (Small Country)
Definition
new price = Pworld + tariff, domestic production increases, imports decrease, consumption decreases
Term
Arguments for Free Trade
Definition
Gains from Trade (comparative advantage), international relations, opportunities for poor countries
Term
Arguments for Protection
Definition
national security, gov't revenue, infant industry, wage standards, environment, unfair practices, open foreign markets, terms of trade, job creation, strategic industries with spillovers
Term
S&D for Large Country Imports
Definition
effects look the same as small country...I really don't get this part...
Term
Returns on capital
Definition
they diminish
Term
Growth rate of Y/L (yield over labor)
Definition
= growth rate of T (technology) + 1/3 * growth rate of K/L (capital over labor)
Term
Catch up theory
Definition
those countries with lower Real GDP per capita should have higher growth rates because they benefit more from increased capital investment (so people invest more there)
Term
Circular Flow
Definition
spending = income
Term
Nominal v. Real GDP
Definition
Real GDP is calculated in terms of prices according to some base year, nominal GDP is calculated according to current prices
Term
Actual v. Potential GDP
Definition
actual is the actual GDP. potential is what you would get if everything was utilized perfectly efficiently
Term
Real v. Nominal Interest Rates
Definition
Real i (interest rate) = i - expected inflation
Term
Labor Market Indicators
Definition
Unemployment Rate (14/150), Labor-Force Participation Rate (150/300), Employment-Population Ratio (135/300)
Term
Types of Unemployment
Definition
seasonal, frictional, structural, cyclical (zero at the natural rate -> means the number of unemployed workers exceeds the number of job vacancies)
Term
Efficiency Wage policies
Definition
screening, effort levels
Term
Long-Term Attachments
Definition
insiders v. outsiders, the invisible handshake
Term
Spending Approach to GDP
Definition
Y = C + I + G + (X-M), consumption investment gov't exports imports
Term
Income Approach to GDP
Definition
labor income + capital income (profits, rent, interest, NOT capital gains) + indirect taxes + depreciation
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